James Schouw in the Vancouver Sun – “Demand will always outstrip supply; Fundamentals and other factors don’t matter; Prices will rise; Don’t worry.”

An article named ‘Supply, demand, and a real estate rebound’ from The Vancouver Sun, 2 Jan 2010 is written by James Schouw, of James Schouw & Associates. The article doesn’t make it clear, but Mr Schouw is a Vancouver condo developer. The author and the Sun may well presume that this fact is just too obvious to mention. Schouw’s projects include ‘Grace Residences’, ‘Iliad’ and ‘Artemisia’. Units in ‘Artemisia’, to be built at Hornby and Helmcken, are now in pre-sale for >$1,000 per sqft. ‘Grace’ has fine street appeal, and is justifiably admired for its style and construction quality. Schouw also appears to have a genuine love for our seawall, and we certainly won’t take him to task for that.

Mr Schouw admits to having a simple approach to RE markets. As he puts it at his own website “Real estate needn’t be complicated. Greater Vancouver’s population quietly grows by about 50,000 each year. We need homes for 1,000 more every week. Meeting that demand will be an increasing challenge.” (quote from the promo slideshow for the Artemisia project).

We differ from Mr Schouw in that we believe that price:income ratios, rent:price ratios, interest rates, overt and covert speculation, inherent leverage, overextended owners, employment levels, the state of the economy, ownership levels, & household debt, are just some of the other factors that need to be taken into account when assessing the health of the Vancouver RE market. Our outlook for Vancouver RE can be found here.

For simplicity sake, and for the record, we here offer this reorganized account of Mr Schouw’s Vancouver Sun article. (Quotes from Mr Schouw in bold; Italicized headings from vreaa):

1. DEMAND & SUPPLY

(a) DEMAND IS, AND WILL REMAIN, HIGH.

(i) Population growth; Immigration.

“Many did not contemplate the rate at which our population grows, and the resulting pressure on real estate. They may not have realized it, but people who wait out the market typically find themselves competing against almost 1,000 more people every week in need of a home in Greater Vancouver.”
“Local housing demand, a function of population change, has continued to grow as it has done for years, along with most of Canada. During the 15 months to July 1, 2009, BC’s population alone grew by 92,593, requiring almost 40,000 additional homes. That’s a normal rate of population growth for BC, representing the number of births and new arrivals minus deaths and people leaving, and isn’t likely to slow.”
“Global population is growing too, by the better part of 100 million every year.”
“As the city continues to mature into its world-class role, increasingly desirable to prospective residents from all continents, home ownership and rental will become less affordable, especially in the urban core.”
“Greater Vancouver’s growing population will continue to absorb about 300 additional units of housing every week.”

(ii) People simply need to own homes.

“Greater Vancouver’s real estate market will continue to be driven by the growing number of people that simply need homes.”
“People need homes, and they can’t just walk away en masse as they can with other investment vehicles.”
“An individual or family doesn’t have to be thrilled about the economy or the Olympics to participate in the housing market. They just have to be living.”

(iii) The Olympics.

“Olympic exposure will indeed help to fuel demand in the long term.”

(b) SUPPLY IS, AND WILL REMAIN, LIMITED.

“Since the middle of 2008 the development industry has fallen well short of meeting demand, and continues to fall short, causing effective inventory to shrink. In Greater Vancouver, certain developers were sitting on hundreds of vacant homes a year ago, but now have none.”
“New properties won’t last for long.”
“Prospective ”sellers” in a stable or growing population are typically also prospective ”buyers.” When thousands of homes change hands, keeping spirits high and realtors busy, neither the stock of usable homes nor the number of people needing those homes necessarily changes. Some sellers may choose to become tenants, but each such decision creates a market for one more landlord-owned home, and inventory remains fundamentally unchanged.”

2. FUNDAMENTALS AND OTHER FACTORS

(a) SPECULATION HAS DISAPPEARED

“Speculation, the catalyst of a ‘bubble’, is largely absent from the market due to lingering fear from the lessons of 2008. A bubble will only materialize if overconfident developers and speculators manage to oversupply demand.”

(b) LEVERAGE IS NEGLIGIBLE

“Average mortgage leverage is a fraction of that in more perilous markets, notably overbuilt ‘bubble’ markets to the south.”
(c) INCOME LEVELS ARE NOT IMPORTANT

“Local real estate will likely be increasingly wealth driven, as opposed to income driven. Income sufficient to finance a home is of little concern to wealthy families that don’t need financing.”
(d) EMPLOYMENT WILL BE GENERATED BY SERVING EACH OTHER

“I’m often asked where we find jobs for all our new residents. When population grows, so does local demand for goods and services. Most Vancouverites, including grocers, plumbers, doctors and so on, make a living serving other Vancouverites. Exports and tourism are only pieces of our diversifying economy.”
(e) THE ECONOMY WILL BE STRONG

“It’s difficult to ignore the emerging importance of Canada’s immense resources, especially on a per capita basis, including fossil fuels, water, minerals and agriculture.”
“Only if our local economy suffers compared to other population centers, as it did in the 1990s relative to Eastern Canada, are we likely to see our growth curve flatten.”

(f) INTEREST RATE RISES WON’T MATTER

“Because of tightening inventory, any foreseeable interest rate increases are more likely to dampen real estate sale volume than to dampen value.”

“Selling prices have been climbing and many buyers have found themselves chasing the market upward. Most values are back in the ballpark of their previous peaks of about two years ago.”
“More would-be sellers may decide to stay put for fear of getting left out of the market. Accordingly, resale volume may shrink but prices will rise.”

(d) DON’T WORRY

“For now, if you own Greater Vancouver Real Estate, relax and have a happy new year.”

“A bubble will only materialize if overconfident developers and speculators manage to oversupply demand”

I guess that means Vancouverites are currently “overdemanding supply.”

I have no quarrel with growing populations eating the oversupply of housing. My quarrel is with how rents can be so detached from prices. If immigration were truly crimping housing supply we would expect rents to be rising, as they did in Alberta a few years ago. Last I checked rents were under significant downwards pressure.

The guy is simply deranged. “Fundamentals don’t matter”? Seriously? Let me file that alongside Dow 36,000 and David Lereah. Free money has made a lot of people crazy, but probably none more so than this guy.

jesse -> Agree re rents. There is no ‘non-bubble’ explanation for rents being flat while prices have doubled. Schouw’s only comment re rents is that they will become “less affordable” in the downtown core. There also appears to be an unstated assumption throughout the piece that people who ‘need’ housing will buy regardless of price levels, rather than considering the metrics of renting vs buying.

rp -> To be fair to Schouw, the “Fundamentals don’t matter” statement is my paraphrasing and distillation from all his comments regarding income/interest rates/etc, rather than his exact words. In essence, however, that is precisely what he is saying.

OK so rising population = higher real estate prices. Vancouver grows by 50K, prices go up. At the same time the world grows by 100 million and (though I dont have numbers to back this up, I am fairly certain) world real estate prices are falling. Something doesnt add up. Could it be possible that there is more to real estate than population growth?

I dont think population in the US has fallen recently and yet real estate prices have plunged. This just raises further question.

People need houses? To live in, arguable, (ever heard of homeless people?) but they dont need to own them. There is always the option of renting which real estate people seem to forget all about. He does mention it, but just says this creates demand for another landlord. If this was true rents would be much higher than they currently are.

“Local real estate will likely be increasingly wealth driven, as opposed to income driven. Income sufficient to finance a home is of little concern to wealthy families that don’t need financing.”

Can’t argue with that, just look at Dubai, wait….

“Because of tightening inventory, any foreseeable interest rate increases are more likely to dampen real estate sale volume than to dampen value.”

Probably the best part. Makes so little sense it boggles the mind that this is in a news article. People will continue to sell for various reasons. If there are less buyers due to decreased affordability, prices will fall as inventory rises.

Funny that you cant comment on this article on the website.

All things aside though that Artemisia place looks amazing. Not worth the price but I love it when good looking buildings are built. They make the city look better and it doesnt cost me anything.